Rents vs Home Prices Correlation?

2 Replies

Hi BP'ers! I think in general the school of thought is that rents tend to go up along with home price appreciation because it is all based on the demand for housing in a particular area. However, this isn't always the case - for example in the housing crash rents in some markets barely budged due to the sudden demand for rentals by foreclosed homeowners. Freddie Mac also had a very low number of foreclosed multi units vs SFR in the Fannie Mae world during that period. I also know during the boom right before that rents didn't go up much in Phoenix where I was buying/renting at the time, even though home prices had almost doubled in just about 5 years. So rents and home prices movements can diverge, and rather dramatically.

In the current real estate market it seems that in most major markets across the US there's a pretty tight correlation between rising rents and rising home prices, some markets even in percentage terms (which I find somewhat remarkable).  For example where I live in Northern California rents in some areas have gone up 50-60% since about 2012-2013, almost the same % as price appreciation. 

So here's my question:  Do rents tend to act more "rationally" (for lack of a better word) than home price appreciation and therefore rental markets are in general more stable and predictable?   And if that is true, in markets where rents and home price appreciation has diverged significantly (i.e. flat to down rents with rapidly rising home prices, or vice versa), can any conclusions be drawn about those markets that might help guide decisions to invest (or not) in those markets?

Join in my humble opinion I think it depends on the area and the access to jobs in a downturn. In my area in the Great Recession larger homes did take a down turn in rental rates and some other less populated areas for sure has to slash there rentals rates.

@John M.

Sacramento is a unicorn market when it comes to rent growth and appreciation, because you have a large population moving here from the Bay Area where rents and home prices are 2-3x as much for comparable properties. So everyone coming from the Bay thinks it's a screaming deal in comparison to what they're used to.

There's a pretty close correlation between rent growth and appreciation because it's all linked to housing demand. Something is worth what someone is willing to pay for it (rent and purchase price), the main difference being that with purchasing homes you have appraisals and tons of data to keep the growth in check. With rents, you just throw it out there and see if someone will pay it. Rent isn't appraised. 

But ultimately it's supply and demand. Less supply + more demand means you can ask more or buyers/renters offer more in order to win. This should be analyzed on a market-by-market basis because the reasons for rent growth and appreciation differ from market to market.

Here's more info on Sacramento if you're interested: